Molycorp (NYSE:MCP) is currently experiencing significant headwinds due to the deterioration in rare earth prices. In its January 10th press release management signaled that 2013 revenues and cash flow would fall short of expectations. Weeks later, it announced a capital raise of approximately $200 million in common stock and $100 million in convertible senior notes due 2018. The fresh capital was to fund 2013 cash requirements, including capital expenditures at its Mountain Pass Facility. The following chart shows Molycorp's third quarter 2012 financial results by segment and an estimate of fourth quarter results.
- For the three months ended September 30, 2012, the company achieved revenues (prior to eliminations and corporate allocations) of $205.6 million and a pretax loss of $26.9 million.
- For the three months ended December 31, 2012, volume, prices, and ultimately revenue, were derived from management estimates provided in Molycorp's January 23, 2013 8-K pursuant to its common stock offering.
- I took the mid-point of management estimates for (i) volume and (ii) price to derive revenue per segment. No estimates for inter-company eliminations, corporate costs or pretax income were given.
- That said, estimated revenue for the fourth quarter is $146.8 million, or about approximately 29% less than the third quarter's. The pretax loss would also widen under such revenue decline.
Shareholders have speculated that Molibdenos Y Metales S.A. ("Molymet") would use the capital raise as a buying opportunity; Molycorp issued 35 million new common shares at $6/share. Yesterday Molycorp announced that Molymet spent $90 million to acquire 15 million new shares, nearly doubling its stake. Its share purchases represented approximately 43% of the new common shares issued, increasing Molymet's total stake to approximately 18.5% of Molycorp's shares outstanding from about 12.4%. Molymet is a Chile-based holding company engaged in the treatment and processing of molybdenum concentrates from the mining industry. Its mining expertise lends to the suspicion that its interest in Molycorp is more strategic than financial. As soon as Molymet raised its stake in Molycorp, the takeover chatter began. On Molycorp: Price Target $3.50 - $6.10/Share Due to Asset Impairment Risk, commenters pointed out the following: (i) After Molymet's acquisition of over 40% of the new common equity offering, Molycorp was effectively "in play" and (ii) Molymet's share purchase was a small step towards the Molycorp buyout Wall Street analysts had predicted. The following chart illustrates Molymet's current holdings.
I still have not changed my stance that given the Mountain Pass mine's strategic importance to the U.S. government, a Molycorp takeover by a foreign entity will never happen. Yet, if the company's financial condition continues to deteriorate, it may need to seek out a strategic partner or face bankruptcy. At that point, Molymet would most likely attempt to acquire a majority stake in Molycorp, forcing the U.S. government's hand. The U.S. would most likely block such an attempt, and buy out Molymet's shares at an attractive return - rendering Molymet's overtures as nothing more than "greenmail."
Regardless, Molymet is sitting in the catbird seat. It will either acquire the only substantial rare earth mine in the U.S. at an attractive entry point, or be paid an above market return on its 18% equity stake. The play for investors is to find an attractive entry point in Molycorp and cash out on a Molymet buyout, or a price on par with Molymet's greenmail payment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.